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- As the coefficient k is the reciprocal of V, the income velocity of circulation of money in the equation of exchange, the two versions of the quantity theory are formally equivalent, though the Cambridge variant focuses on money demand as an important element of the theory.
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The Quantity Theory states the relationship not with absolute correctness but only approximately. Dr. Milton Friedman (the 1976 Nobel Prize winner) believes that the quantity theory of money is true in its simple or cured form, i.e., price (P) varies with quantity of money (M).
The Modern Form of the Quantity Theory: Friedman's Income Version a) While the Cambridge cash balances approach apparently resolved the problem of V, it did not resolve the quite intractable problem of T. Modern economists, however, have more or less resolved that problem by ignoring the total volume of transactions, and by looking instead
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Both quantity theories, Cambridge and classical, attempt to express a relationship among the amount of goods produced, the price level, amounts of money, and how money moves. The Cambridge equation focuses on money demand instead of money supply .
As the coefficient k is the reciprocal of V, the income velocity of circulation of money in the equation of exchange, the two versions of the quantity theory are formally equivalent, though the Cambridge variant focuses on money demand as an important element of the theory.
On the other hand, the Cambridge version is realistic because it studies the psychological factors which influence k. It is on account of these differences that Hansen wrote: “It is not true as is often alleged that the cash balance equation is merely the quantity theory in new algebraic dress.”
